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You bought gap insurance to ensure you don’t wind up out of pocket if your car is a total loss and the settlement doesn't cover your loan. But are there times when your gap insurance coverage won’t pay?

A gap insurance policy serves a single purpose, and that's to pay the difference between what your car is worth and what you owe on it when it's a total loss. However, there can be a gap insurance claim limit, and there are other times when your gap insurance claim might be denied or the policy simply doesn’t cover you.

"Gap insurance only pays in one situation: your car is totaled or stolen, and you owe more than it’s worth. So gap insurance does not cover if a car is not declared a total loss. For example, gap insurance does not reimburse the costs of normal maintenance, repairs after a car accident, and regular car loan or lease payments." Dr. Yongqing Wang, Professor of Economics at the University of Wisconsin-Milwaukee at Waukesha, says.

Read on to learn how and when gap insurance won’t pay.

  • Gap insurance doesn’t cover any damage that isn’t a total loss.
  • Some gap insurance policies may have a limit on the amount of the claim, usually a percentage of the vehicle’s value.
  • If the policy has lapsed due to non-payment when the total loss occurs, the policy will not pay anything.

Can gap insurance deny a claim?

Gap insurance companies can deny a claim for a variety of reasons. The most common reasons are a loss that isn’t covered by the policy or that the policy has lapsed.

Gap insurance only pays in one situation: After an accident, your car is a total loss and you owe more than it’s worth.

You can’t file a claim for any damage that isn’t a total loss, or for any other damages that result from an accident.

Gap insurance can deny your claim in a few situations:

  • The policy lapsed for nonpayment before the date of the total loss
  • Fraud or misrepresentation
  • The claim isn’t covered by the policy

If the policyholder is in violation of the terms of their car loan or lease agreement, such as failing to make payments or not having the proper coverage, the gap insurance policy may not pay out. Additionally, gap insurance policies typically have a waiting period before coverage begins, during which the policyholder would not be covered for a total loss." Andrew Lokenauth, adjunct professor at the University of San Francisco, says.

Does gap insurance have a claim limit?

You’ll have to check your policy to find out if there is a claim limit and if so, how much it is. Some policies do put a limit on the percentage of the vehicle’s value they will pay out after a total loss.

If you’re very upside down on your car, meaning you owe a lot more than it’s worth, you may not be covered in full by gap insurance. In most cases, however, the gap insurance claim limit should be enough to cover the negative equity on your loan.

"Gap insurance does not finance the amount that is over the limit given by the policy. Gap insurance usually does not compensate deductibles." Wang says.

How to file a gap insurance claim

Gap insurance only comes into play when your car is a total loss. That means the damage will cost more to repair than the car is worth.

When this happens, the insurance company will determine the value of the car and send you a check, minus your deductible, for that value. Once that value has been determined, and if it’s lower than what you owe on the car, you can file a gap insurance claim.

Some gap insurance policies will cover your deductible, while others will only pay the difference between what you owe and the car’s value. Make sure to read the fine print; you might still be out of pocket for the deductible amount, even with gap insurance.

Here’s an example. You owe $20,000 on your car loan. Your car is totaled, and the insurance company values it at $15,000. The difference in this case is $5,000. That’s the amount the gap insurance company will pay.

If you have a $500 deductible, you will get a $14,500 check from the car insurance company, and a $5,000 check from the gap insurance company. Unless the gap policy includes deductible reimbursement, that $500 is your responsibility.

"If the policyholder's claim is denied, they can appeal the denial by providing additional documentation and evidence to support their claim. It is also important to review the terms and conditions of the policy and ensure that the policyholder did not violate any of the terms and conditions." Lokenauth says.